Wednesday, September 15, 2010

Now, suppose Japanese officials believe
that intervention is required regardless of the G-20. Presumably, they
will give US Treasury Secretary Timothy Geithner a phone call to at
least keep him in the loop, if not to receive his implicit consent. One
wonders if Geithner will recognize what he would be consenting to:
Japanese intervention, if it occurs, means that Chinese authorities
managed to get Japan to acquire their Dollar reserves for them.
Instead of buying Dollars, China buys Yen, which in turn induces Japan to
buy Dollars. This maintains the artificial capital flows to the US
while allowing China to escape accusations of being a "currency
manipulator."

Japan’s government said it will seek
discussions with China over the nation’s record purchases of Japanese
bonds as an appreciating yen threatens to undermine an economic
recovery.

Japan is closely watching the
transactions and will seek to maintain close contact with Chinese
authorities on the issue, Vice Finance Minister Naoki Minezaki told
lawmakers in Tokyo. Finance Minister Yoshihiko Noda suggested at the
same hearing that it’s inappropriate for China to buy Japan’s bonds
without a reciprocal ability for Japanese to invest in China’s market.

Did policymakers recognize the irony of their situation? It is not
exactly a secret that Japan has made frequent excursions into the
currency markets. But apparently they feel that intervention should be
limited to Dollar purchases. Surely another Asian nation wouldn't play
the same game on them?

Alas, the Chinese did - under pressure to "loosen" the renminbi -
and pushed the Japanese into intervening last night to tame the surging
Yen. In effect, the Chinese managed to get the Japanese to do their
Dollar buying for them. Honestly, I have a hard time faulting the
Japanese. They are facing a serious deflation problem, and pumping Yen
into the system is an appropriate response (although they might
simply sterilize the intervention, which would be, in my opinion, a
policy error).

What must be going through the head of US Treasury Secretary Timothy
Geithner at this point? After all, as far as global imbalances are
concerned, if he can't stop central banks from intervening in the
Dollar, he really isn't going to be making much progress on reversing
the deteriorating US trade deficit. And before anyone gets too excited
about the most recent trade numbers, note the trend remains intact. Moreover, CR is tracking the LA ports data, and it looks ugly. Geithner is now out and about trying to jawbone Chinese officials. From his interview with the Wall Street Journal:

WSJ: Are you satisfied with China’s progress on the yuan?

Geithner: Of course not. China took the
very important step in June of signaling that they’re going to let the
exchange rate start to reflect market forces. But they’ve done very,
very little, they’ve let it move very, very little in the interim. It’s
very important to us, and I think it’s important to China, I think they
recognize this, that you need to let it move up over a sustained period
of time.

So, Geithner finally realizes the extent of the Chinese nonevent.
Recall the press fanfare that accompanied the initial Chinese currency
announcement - journalists falling all over themselves to speak brightly
of China's economic maturation. How many of those stories were sourced
by Treasury officials crowing about the breakthrough that allowed them
to avoid labeling China a currency manipulator? And where does this
leave Geithner? Either complicit in trumping up the most minor of
policy adjustments, or completely sucker punched by his Chinese
counterparts. Honestly, I don't know which is worse.

What it all boils down to is this: There apparently is no motivation
for global central banks to stop directing capital inflows at the US in
an effort to support mercantilist objectives. If it isn’t China, it
will be some other economy. And equally apparent, there is no
motivation among US policymakers to address such government directed
capital flows. Which will leave politicians falling back on ultimately
harmful trade barriers. The absolute inability of US policymakers to
seriously address a global financial architecture where a rule of the
game is "when in doubt, by Dollars" will ultimately have serious
consequences via disruptive adjustment when the system can no longer be
maintained, via either external or internal forces.

Comments

Now, suppose Japanese officials believe
that intervention is required regardless of the G-20. Presumably, they
will give US Treasury Secretary Timothy Geithner a phone call to at
least keep him in the loop, if not to receive his implicit consent. One
wonders if Geithner will recognize what he would be consenting to:
Japanese intervention, if it occurs, means that Chinese authorities
managed to get Japan to acquire their Dollar reserves for them.
Instead of buying Dollars, China buys Yen, which in turn induces Japan to
buy Dollars. This maintains the artificial capital flows to the US
while allowing China to escape accusations of being a "currency
manipulator."

Japan’s government said it will seek
discussions with China over the nation’s record purchases of Japanese
bonds as an appreciating yen threatens to undermine an economic
recovery.

Japan is closely watching the
transactions and will seek to maintain close contact with Chinese
authorities on the issue, Vice Finance Minister Naoki Minezaki told
lawmakers in Tokyo. Finance Minister Yoshihiko Noda suggested at the
same hearing that it’s inappropriate for China to buy Japan’s bonds
without a reciprocal ability for Japanese to invest in China’s market.

Did policymakers recognize the irony of their situation? It is not
exactly a secret that Japan has made frequent excursions into the
currency markets. But apparently they feel that intervention should be
limited to Dollar purchases. Surely another Asian nation wouldn't play
the same game on them?

Alas, the Chinese did - under pressure to "loosen" the renminbi -
and pushed the Japanese into intervening last night to tame the surging
Yen. In effect, the Chinese managed to get the Japanese to do their
Dollar buying for them. Honestly, I have a hard time faulting the
Japanese. They are facing a serious deflation problem, and pumping Yen
into the system is an appropriate response (although they might
simply sterilize the intervention, which would be, in my opinion, a
policy error).

What must be going through the head of US Treasury Secretary Timothy
Geithner at this point? After all, as far as global imbalances are
concerned, if he can't stop central banks from intervening in the
Dollar, he really isn't going to be making much progress on reversing
the deteriorating US trade deficit. And before anyone gets too excited
about the most recent trade numbers, note the trend remains intact. Moreover, CR is tracking the LA ports data, and it looks ugly. Geithner is now out and about trying to jawbone Chinese officials. From his interview with the Wall Street Journal:

WSJ: Are you satisfied with China’s progress on the yuan?

Geithner: Of course not. China took the
very important step in June of signaling that they’re going to let the
exchange rate start to reflect market forces. But they’ve done very,
very little, they’ve let it move very, very little in the interim. It’s
very important to us, and I think it’s important to China, I think they
recognize this, that you need to let it move up over a sustained period
of time.

So, Geithner finally realizes the extent of the Chinese nonevent.
Recall the press fanfare that accompanied the initial Chinese currency
announcement - journalists falling all over themselves to speak brightly
of China's economic maturation. How many of those stories were sourced
by Treasury officials crowing about the breakthrough that allowed them
to avoid labeling China a currency manipulator? And where does this
leave Geithner? Either complicit in trumping up the most minor of
policy adjustments, or completely sucker punched by his Chinese
counterparts. Honestly, I don't know which is worse.

What it all boils down to is this: There apparently is no motivation
for global central banks to stop directing capital inflows at the US in
an effort to support mercantilist objectives. If it isn’t China, it
will be some other economy. And equally apparent, there is no
motivation among US policymakers to address such government directed
capital flows. Which will leave politicians falling back on ultimately
harmful trade barriers. The absolute inability of US policymakers to
seriously address a global financial architecture where a rule of the
game is "when in doubt, by Dollars" will ultimately have serious
consequences via disruptive adjustment when the system can no longer be
maintained, via either external or internal forces.